Hi
I am a little bit out of my depth here but I think I might be able to shed some light on some of the behaviours.
the "Permission Denied" on the XDocument.UI.ShowModalDialogue happens when the form is not in full trust, could this be down to Internet Explorer blocking the opening of a new page, full trust solves this. I think it is just a security setting.
Your second problem revolves around the XmlHTTP working out of full trust but failing under full-trust. I can only presume here but by making the form full-trust the web service denies permission because the form is making the request rather than the user?
Sorry I can't be clearer but I hope it helps.
Adam